Teledyne Mid-America Corporation v. HOH CORPORATION

• Decision Date: 31 October 1973
• Docket Number: No. 72-2609.,72-2609.
• Citation: 486 F.2d 987
• Parties: TELEDYNE MID-AMERICA CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. HOH CORPORATION, a Hawaii corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

486 F.2d 987 (1973)

TELEDYNE MID-AMERICA CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. HOH CORPORATION, a Hawaii corporation, et al., Defendants-Appellees.

No. 72-2609.

United States Court of Appeals, Ninth Circuit.

October 31, 1973.

L. Richard Fried, Jr. (argued), John P. Gillmor, of Bortz, Case, Stack, Kay, Cronin & Clause, Honolulu, Hawaii, for plaintiff-appellant.

William M. Swope (argued), of Cades Schutte Fleming & Wright, Albert I. Moon, Jr., of Ashford & Wriston, Honolulu, Hawaii, for defendants-appellees.

Before KOELSCH, WRIGHT and TRASK, Circuit Judges.

TRASK, Circuit Judge:

This is an appeal from a judgment of the District Court of Hawaii granting the motion of appellees C. W. Shafer and Jane Shafer to dismiss the plaintiff's complaint under Rule 12(b) of the Federal Rules of Civil Procedure, and granting the motion of appellee HOH Corporation for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The district court had jurisdiction under 28 U.S.C. § 1332, diversity of citizenship, and this court has jurisdiction under 28 U.S.C. § 1291.

Both motions were made in response to a suit brought by the appellant for the collection of trade payables totaling $39,499.65. The complaint charged the Shafers and HOH Corporation with joint and several liability as guarantors of the above-stated debt.

I. Teledyne's claim against the Shafers

On April 12, 1965, C. W. Shafer doing business as Shafer Distributing Company, a sole proprietorship, entered into a franchise agreement with Packard-Bell Sales Corporation giving Shafer the right to distribute Packard-Bell electronic products in Hawaii. Packard-Bell was the predecessor in interest of plaintiff-appellant Teledyne Mid-America Corporation (Teledyne). In connection with the franchise arrangements, C. W. Shafer and Jane Shafer executed a "Continuing Guaranty" dated April 12, 1965, whereby they jointly and severally guaranteed to pay the franchisor, ". . . any and all indebtedness of C. W. Shafer dba Shafer Distributing Co. . . ." Since C. W. Shafer was in effect guaranteeing his own obligation, the principal economic significance of the instrument was to add Jane Shafer as an obligor.¹ The instrument did not purport to bind the successors or assigns of the Shafers. The guaranty did purport to waive certain defenses such as the statute of limitations, need for presentment or protest, etc., and gave the creditor rights of enforcement against any security.

On November 9, 1965, C. W. Shafer incorporated the sole proprietorship pursuant to the laws of the Territory of Hawaii under the corporate name "Shafer Company, Inc." New shareholders thereafter acquired interests in the corporation. On April 5, 1970, all of the then stockholders of Shafer Company, Inc. transferred their shares of common stock to the appellee, HOH Corporation (HOH), in exchange for shares of stock in HOH. The trial court found that a statutory merger thereafter took place between the old corporation and HOH with the surviving corporation as a newly-formed "Shafer Company, Inc."; and that the former Shafer Company, Inc. had "ceased to exist as a matter of law." Packard-Bell (the predecessor of Teledyne) was notified on May 12, 1970, of the statutory merger, with Shafer Company, Inc. becoming a wholly owned subsidiary of HOH.

On May 21, 1970, Shafer by letter requested the return of his personal guaranty and repeated the request orally on at least two subsequent occasions. The requests were refused. In answer to the written request Shafer was told that it was the "company policy" to obtain the personal guaranties of the principals as well as the corporate guaranty.² In answer to one of the oral requests he was told that he would have to wait until the account was "more current." The continuing guaranty was never returned.

On the basis of this continuing guaranty, Teledyne sought to collect $39,499.65 in alleged merchandising debts from the Shafers.³ Appellant's contention is that the continuing guaranty executed by Mr. and Mrs. Shafer guaranteed the debts of the "business" irrespective of its type of legal organization, ownership, management, size or the essential nature of its operation. The principal cases upon which the appellants rely are D. N. & E. Walter Co. v. Zuckerman, 214 Cal. 418, 6 P.2d 251 (1931) and New York American Inc. v. Hub Advertising Agency, Inc., 136 Misc. 596, 240 N.Y.S. 367 (1930). In Zuckerman, a guarantor was held liable for the debts of a sole proprietorship after it was incorporated upon the ground that the corporation was the alter ego of the sole proprietor who owned all of the stock during the period in which the guaranteed obligation was incurred. Here, shortly after incorporation on November 9, 1965, other investors acquired stock and the essential nature of the business enterprise changed.⁴ Shafer was no longer the holder of the majority of the shares issued and outstanding, even though he continued as the corporation's chief executive; moreover, as a guarantor the essential nature of his risk and his responsibility had changed. As an individual his personal financial risk was measured by whatever limitations he chose to effect and his own credit would support. With additional corporate capital for use in expanded operations, his liability became greatly expanded and his control diluted. Both he and his wife may well have declined to risk their personal fortunes to such an enlarged undertaking as guarantors of a corporate liability. Instead, they chose to operate as a corporation with personal liability limited to corporate investment. This permitted an expanded operation with limitations on risk to personal assets employed in the business. Shafer continued to operate as a corporation on a larger scale with the additional capital of new stockholders and then, by merger, became a subsidiary of HOH.

No fraud or misconduct is charged to Shafer in progressively enlarging and changing the character of the operation. His method of doing business was well known or could have been. The change of name and legal organization would have been readily apparent upon the checks of the business, reflected in the name and a matter of public record in the state.

New York American, Inc. v. Hub Advertising Agency, supra, relied upon by appellant is a case decided in the City Court of New York. It appears to be somewhat relevant but the facts stated are insufficient to determine its real materiality. No authorities are cited. The guaranty was on April 2, 1928; the incorporation of the three-man proprietorship was on July 19, 1928. What happened thereafter and when is not told. We do not find it authoritative. More to the point is Wheeling Steel Corp. v. Neu, 90 F.2d 139 (8th Cir. 1937), followed recently by Sherman Car Wash Equipment Co. v. Maxwell, 297 F.Supp. 712, 716 (E.D.Pa.1969). In Wheeling Steel Corp., supra, under a guaranty of goods sold to "Joseph Himmelspach" doing business as "J. Himmelspach Supply Company," the guarantor was held not liable for goods sold to a corporation of the same name organized several months after the guaranty was executed. Nor is this case controlled by section 128 of the Restatement of Security. That section applies to modifications of the contract and the conditions under which such a modification without the consent of the surety releases that surety. The difficulty here is more basic. Here there is not just a change in the character of the obligation, nor is its time or manner of payment that which is altered. The creditor here seeks to reach a different debtor, an entirely different legal entity than the original obligor. There is no question but that the Shafers, as original guarantors, remain liable for any unpaid obligations of the sole proprietorship. There never was a continuing guaranty executed by C. W. Shafer and Jane Shafer for Shafer Company, Inc., a corporation, either solely owned by Shafer or by him with other shareholders. The fact that they sought to retrieve the guaranty cannot enlarge their obligation simply because it suggests they believed they might have some liability under it. We therefore hold that the trial court properly granted the motion to dismiss of appellees, C. W. Shafer and Jane Shafer.

II. Teledyne's claims against HOH

On April 5, 1970, in a statutory merger proceeding, HOH Corporation acquired all of the capital stock of Shafer Company, Inc. in exchange for shares of HOH. Shafer Company, Inc. had been in business as a corporation approximately five years; HOH was founded a little over seven years prior to the merger. On May 22, 1970, HOH executed its continuing guaranty of the indebtedness of Shafer Company, Inc. "heretofore, now, or hereafter made." Apart from the guaranty, the fact that Shafer Company, Inc. had become a wholly owned subsidiary of HOH did not alter its legal relationship with Teledyne (successor to Packard-Bell). Purchases continued to be made by Shafer Company, Inc. from Teledyne, and payments on account were made by Shafer Company to Teledyne. The franchise remained in the name of C. W. Shafer. At the time Shafer obtained the franchise he had entered into an agreement with Teledyne called a Distributor Profit Protection Agreement. Under the terms of that agreement, the distributor (Shafer) would pay into a fund established by the agreement one-quarter of one percent of his previous month's sales. Other franchise holders did likewise. The fund was held and administered by Teledyne. If a customer of the distributor failed to pay for merchandise sold and the account became uncollectible, the distributor could make a claim against the fund subject to availability of monies therein. In December of 1969, and prior to the merger, Shafer Company, Inc. had made claims against the fund aggregating $40,860.66. Teledyne had responded that funds were not then available to pay the claims. A dispute existed as to whether or not Teledyne had...